UK economy to rise 1.4% this year and by 2% in 2014.

5th November 2013

Britain’s economy will expand by 2% in 2014 and finish this year 1.4% stronger according to an influential think-tank.

Following two years stagnation, economic growth has returned, underpinned by an increase in consumer spending and growth will continue, albeit at a slightly slower rate than in the first half of this year says a report from The National Institute of Economic and Social Research (NIESR).

The organisation expects GDP to return to its previous peak in early 2015, although per capita GDP will still remain well below the 2008 peak. This central forecast implies only a gradual elimination of the large negative output gap.

It says: “The upward revisions to our forecasts have returned them to roughly where they were in August 2012. Both the deterioration in the forecasts in late 2012 and early 2013, and the improvements since, reflect changes in the outlook for consumer spending and developments in the Euro Area.

“Underpinning this is a judgement that increased activity in the housing market will spill over into real economic activity, in the form of additional consumer spending financed by a lower saving rate.”

Consumer spending growth is necessary for an economic recovery in the UK, but a consumer-driven recovery will not be ‘balanced’, let alone one reflecting the required long-term ‘rebalancing’ towards an economy with greater net national saving says the NIESR report. By 2018 the UK is expected to continue to require foreign financing (a balance of payments deficit) equivalent to around 2% of GDP.

The report continues: “We expect the underlying public sector deficit (as a per cent of GDP) to fall slowly this year, but this should accelerate in the following years. Our forecast is that the current budget will be roughly balanced in 2017–18. The rolling forward of the five year horizon for the government’s ‘primary fiscal target’ to 2018–19, means that the government should comfortably hit its primary fiscal target.

“The government’s current plans are for public sector net investment to stabilise at 1.5% of GDP. Additional capital expenditure in assets that have positive impacts on long-run growth would also have the added benefit of providing a support to the recovery in the short-term.”

The decision by the Bank of England’s Monetary Policy Committee to use the unemployment rate as the intermediate threshold in its forward guidance has focused even more attention on this statistic. But the NIESR says there is a considerable uncertainty about the rate at which unemployment will fall.

It says: “While our central forecast is that unemployment will not drop below 7% until 2016, we estimate a 20% chance that it will fall below that level as early as the first quarter of 2014. Our forecast assumes a rise in interest rates in the second half of 2015.”